CARPE DIEM

Professor Mark J. Perry's Blog for Economics and Finance

Tuesday, February 06, 2007

Hugo Chavez in a Pantsuit

On CNBC's Kudlow & Company last Friday night, writer and humorist P.J. O’Rourke referred to Hilary Clinton as “Hugo Chavez in a pantsuit.” As Larry Kudlow says "Hillary Clinton doesn’t want corporations to pay any taxes at all—not a single penny. Hillary plans on confiscating their profits altogether!" Watch Hillary's speech where she says "I want to take those profits (of the oil companies)."

U.S. Culture Rewards Innovation and Risk-Taking

A dynamic economy is much more than the sum of its test scores. It's part of a culture that rewards innovation and risk-taking and values unconventional problem-solving. Much of this is nurtured in U.S. schools, even if it can't be quantified on a test.

Recently, Newsweek International noted Singapore's success on international math and science exams but asked its Education Minister why Singapore produced so few top-ranked scientists, entrepreneurs, inventors, business executives and academics.

"We both have meritocracies," he replied. America's "is a talent meritocracy, ours is an exam meritocracy. There are some parts of the intellect that we are not able to test well – like creativity, curiosity, a sense of adventure, ambition. Most of all, America has a culture of learning that challenges conventional wisdom, even if it means challenging authority. These are the areas where Singapore must learn from America."

From an editorial in today's Dallas Morning News. Bottom Line: With 5% of the world's population, Americans have won almost 50% of Nobel prizes awarded in the sciences (chemistry, physics, medicine and economics) over the last 100 years because of our culture of innovation, challenging authority and risk-taking. Singapore has won 0 Nobel prizes.

Interesting Facts of the Day

1. The used car and truck business dwarfs new car sales in the United States and accounts for a larger share of earnings by the over 21,000 franchised car dealerships because of the higher margins used vehicles carry.2. In 2006, 42.5 million used vehicles were sold in the U.S., compared to 16.55 million new cars.

Quote of the Day

Predatory Pricing, Price Gouging, or Price Fixing?

I thought we were mostly worried about high gas prices, but in Colorado, a court ruled that prices at some gas stations were TOO LOW, and those gas stations were accused of "predatory pricing":

"After a price war among several gas stations forced retail gas prices in Montrose, Colorado below wholesale cost in January 2005, several stations filed a lawsuit that asked the court to stop a competitor's program of giving a 7-cents-per-gallon gas discount to shoppers who purchased more than $100 in groceries over a 30-day period, citing the Colorado Unfair Practices Act in their case."

In Florida, politicians are worried that gas prices are TOO HIGH, and want to stop "price gouging":

"Florida Agriculture and Consumer Services Commissioner Charles H. Bronson today urged state residents to report any instances of price-gouging in the wake of the tornadoes that tore through four Central Florida counties overnight. Under Florida law, it is unlawful to charge exorbitant or excessive prices for essential items -- including shelter, gasoline, food, water, ice, generators or lumber."

And in Ohio, politicians are worried about "price fixing" and collusion.

Bottom Line: In the topsy-turvy world of politics and anti-trust law, you can get in trouble as a gas station owner for almost any price you charge. If politicians or courts think your prices are too low, you can be accused of predatory pricing; if your prices are too high, you'll be charged with price gouging; and if your prices are the same as your competitors, you can be charged with price-fixing or collusion.

Tiger Woods vs. Jack, Michael Jordan vs. Larry

From Brian Wesbury at Real Clear Politics, via Division of Labour:A widening income gap reflects a long-running historical truism. Whenever technology advances rapidly, the so-called gap between the rich and the poor widens. This does not mean that those at the low end actually experience falling standards of living. In fact, technology lifts standards of living for all, often by lowering the prices of goods and services.

For example, companies serving consumers across the income spectrum have performed well recently. And even with recent weakness in housing, more new homes have been sold in the past four years than during any four year period of history, while home ownership rates have surged to record highs. Air miles flown, sports attendance, cell phone ownership, flat screen TV sales, jewelry sales, and dining out are all at record levels. This is not the type of economic activity one would expect in an economy where wide swaths of citizens are falling behind.Nonetheless, incomes at the top (earned by entrepreneurial innovators or early-technology-adopters) rise more rapidly. This divergence happens whenever growth picks up due to technological innovation. And it is even more pronounced in recent decades because of technology.

For example, Michael Jordan and Tiger Woods earn much more than Larry Bird or Jack Nicklaus ever did because of the global reach of television. A rising income gap signals growth and opportunity for investors and the economy, and should not be viewed as a problem in a free economy. Income gaps in third-world countries, ruled by dictators, are a more serious development because they reflect exploitation and an abuse of political advantage.

Carpe Diem in Chinese

Monday, February 05, 2007

U.S. Stock Market, 1800-2007

In a previous CD post "Economic Growth," I had a graph of world GDP per capita from 1 - 2003 A.D., and commented that "sustained economic growth of even 1% per year was not a reality until the 19th century, and sustained economic growth of 2-3% was not a reality until the last 50 years," and only in advanced economies like the U.S.

That post generated a lot of interest, and it was linked to several other blogs. That made me think about historical stock market performance, which should follow the same historical pattern as economic growth, since they are linked so closely together. Without positive economic growth, you won't have positive stock market growth.

Sure enough, sustained positive growth in the U.S. stock market was not a reality until 1950, see the graph above of the S&P 500 Index from 1800-2007. The S&P 500 Index stock series back to 1800 is from Global Financial Data.

An Undertaxed America?

From today's Investor's Business Daily:1. U.S. corporate taxes are the second highest among industrialized nations. As a percentage of GDP, corporate income taxes rose from 1.2% in 2003 to 2.3% in 2005, the highest level in 25 years. 2. About 14 million Americans at lower incomes have been removed from the federal income tax rolls since 2000 because of the earned income tax credit and the per-child tax credit. 3. The rising tax burden (see graph above) is borne disproportionately by those who are successful. The top 50% of Americans pays almost 97% of income taxes. And most of that — 54% — is paid by the top 5%, and the top 1% pay more than 34% of all personal income taxes collected.

4. The CBO found that the after-tax income of those "superrich" actually declined after the 2003 tax cuts — by 8.3% from 2000 to 2004.

Why is Health Care So Expensive?

Most Americans get medical coverage through their employers, which is a strange situation when you think about it. People do not expect their employers to pay for their car insurance, their life insurance or their homeowner's insurance. Why should employers pay for their health insurance? This strange situation was created more or less by accident. During World War II, businesses competing to attract scarce workers got around wage and price controls by offering health insurance instead of higher pay. In 1943 the Internal Revenue Service decided not to count this increasingly popular fringe benefit as taxable income, a policy codified by Congress in 1954. The seemingly free coverage makes health care more expensive for everyone. Not only are you unlikely to know or care how much your employer spends on health insurance, but the coverage may be more generous than you would choose on your own, which means you are unlikely to know or care how much particular services cost. If you were using your own money to buy insurance, you might opt for a cheaper policy with a higher deductible, in which case you would be more conscious of things like the fee for an office visit or the difference in price between name-brand and generic drugs. Indifference to such considerations contributes to escalating health care costs. See a previous Carpe Diem post here on the same topic.

Quote of the Day

"Every politically controlled educational system will inculcate the doctrine of state supremacy sooner or later. . . . Once that doctrine has been accepted, it becomes an almost superhuman task to break the stranglehold of the political power over the life of the citizen. It has had his body, property and mind in its clutches from infancy. An octopus would sooner release its prey. A tax-supported, compulsory educational system is the complete model of the totalitarian state." ~Isabel Paterson, The God of the Machine (1943) Related, from The Cato Institute: "The Utah House of Representatives passed the nation’s first universal school voucher bill, and it’s probably going to pass the Senate this week as well, and be signed by the governor. If it is signed into law, it will be an unprecedented step forward for educational freedom in this country."

Sunday, February 04, 2007

It Took India 35 Years, But Friedman Was Right

"In a memorandum dated November 5, 1955, submitted to the government of India, Milton Friedman, who predicted the end of the post-war boom and stagflation, was at his prescient best while candidly critiquing the model of planned development being formulated under the auspices of the eminent mathematician P. C. Mahalanobis. It is worthwhile revisiting Milton Friedman’s arguments, as valid now as they were then, with most of them quietly implemented over three decades later as part of India’s new economic policy from the 1990s."From the article "Milton Friedman and India," in the Economic Times of India, via Professor Lawrence White at Division of Labour.

India vs. China

India's real GDP grew by 9.2% in the year to last September (the latest numbers available). Over the past four years it has clocked up an average annual pace of more than 8%, compared with around 6% in the 1980s and 1990s—and a measly 3.5% during the three decades before 1980, when highly interventionist policies shackled the economy (see graph above).

India seems to be reaping the rewards of reforms that were made in the early 1990s. These massively lowered barriers to trade and liberalized capital markets. As a result, total trade in goods and services has leapt to 45% of GDP, from 17% in 1990.

Quote of the Day

"The inverse relationship between quantity demanded and price is the core proposition in economic science, which embodies the presupposition that human choice behavior is sufficiently rational to allow predictions to be made. Just as no physicist would claim that "water runs uphill," no self-respecting economist would claim that increases in the minimum wage increase employment. Such a claim, if seriously advanced, becomes equivalent to a denial that there is even minimal scientific content in economics, and that, in consequence, economists can do nothing but write as advocates for ideological interests. Fortunately, only a handful of economists are willing to throw over the teaching of two centuries; we have not yet become a bevy of camp-following whores." ~James Buchanan, 1986 Nobel economist, George Mason Univ.

The New Global Economics of Modeling

From Saturday's WSJ, an article about "the new economics of modeling -- lower fees and a surge of Russians."

The global economy is transforming the modeling world. Supply has soared, as aspirants from developing countries stampede into the field. At last season's New York's fashion week, the quintessentially American design house of Calvin Klein didn't send a single American down its catwalk. Twelve of the 22 chosen were from Russia and Eastern Europe.

"There's so many models now. It used to be the Americans, Europeans and Canadians. Then we got the influx of Brazilians, Russians, Eastern Europeans," says American designer Nicole Miller. "There are just thousands every year."

Investing Goes Global

From an article The Global Bet, in today's Wash Post Business Section:

1. Six years ago, only about 8% of new money flowing into U.S. stock funds was invested overseas. Now, that number is hovering around 77%, as American investors look longingly at soaring returns in international markets.

2. Investors have a total of $5.3 trillion invested in U.S. stock funds, including $950 billion in international stocks. Although that only accounts for 18%, that total is growing rapidly as overseas gains outpace gains in U.S. markets and as globalization makes Americans more aware of foreign companies and products.

3. Last year, international funds had average returns of 26%, compared with 12% for domestic funds. Funds that invest in emerging markets had gains of 32%. Gains have been even more dramatic in rapidly growing countries such as Brazil, Russia, India and China.

Saturday, February 03, 2007

Exxon Mobil: $3.4M Every Hour in Taxes!

The Associated Press reported this week that "Oil giant Exxon Mobil topped its own record for the biggest annual profit by a U.S. company last year, racking up earnings ($39.5 billion) that amounted to $4.5 million an hour for the world's largest publicly traded oil company."

MP: What hasn't been reported is the fact that Exxon will probably also set another notable record: the highest amount of taxes ever paid by a U.S. company, estimated to be about $30 billion for 2006. That works out to about $3.4 million in taxes paid every hour by Exxon in 2006!Larry Kudlow says "Congratuations to Exxon. Profits are the core of capitalism and the wellspring of abundance in this great country. They are the mother’s milk of stocks and the economy. Expanding profits provide businesses the resources to enlarge production operations and hire additional workers. And that in turn is how incomes are created for family spending."

$3.5T Increase in Household Net Worth

It was announced this week by the Associated Press that "People are saving at the lowest level since the Great Depression, and that could be a problem for the millions of baby boomers getting ready to retire." This is based on the Commerce Department's report on Thursday that the "savings rate" for 2006 was -1%.

"As a statistic, however, the official "savings rate" is nearly as useless a guide to prosperity as the trade deficit. In the government accounts, what is called the savings rate is literally income less consumption. But the government defines income too narrowly and consumption broadly. For example, "income" doesn't measure capital gains (whether realized or not), the rising value of your home, or even increases in your retirement accounts.

Think about how you calculate your own personal "savings rate." Do you merely add up what you make in salary in a year minus what you spend? Or do you sneak a peak at whether your IRA increased in value, or check the sale price your neighbor got on his home to figure out what you might be able to get for yours? By any normal definition, "savings" should include your increase in total assets -- in other words, your gains in overall wealth."

MP: As the WSJ points out, we should focus more on "household net worth" as reported by the Federal Reserve than the "savings rate" reported by the Commerce Department. From the most recent release by the Fed for 3rd quarter 2006:

1. Between 3rd quarter 2005 and 3rd quarter 2006, household net worth increased by $3.5 trillion to $54 trillion, a 7% annual increase. The $3.5 trillion increase works out to about a $12,000 per person annual increase in net wealth, or almost $50,000 per household of 4! The $54 trillion total net worth works out to $180,000 per person, or $720,000 for a household of 4!

2. During that period, household real estate and other tangible assets increased in value by more than $2 trillion, and financial assets like mutual funds held by households increased in value by $2.6 trillion. Liabilities increased by $1.1 trillion, resulting in the $3.5 trillion increase in net worth.

3. As the related graph above from the American Shareholders Association shows, the combined assets of mutual funds and exchange traded funds (ETFs) increased $1.63 trillion in 2006, an increase of 17.7% compared to 2005. Total mutual fund and ETF assets ended 2006 at almost $11 trillion.

Bottom Line: When you have an annual increase in U.S. household net worth of $3.5 trillion and the stock market is booming and keeps setting record highs: a) any comparison the Great Depression is a real strech, b) baby boomers have nothing to worry about, and c) a negative savings rate is meaningless.

Friday, February 02, 2007

Economic Week in Review

Summary: As expected, the Federal Open Market Committee decided on Wednesday to hold the Federal Funds rate steady at 5.25%, where it's been since June of 2006. In other reports, 4th quarter 2006 GDP grew at 3.5% and employment costs held steady. Consumer confidence remains high despite the continuing slump in housing. The Dow Jones Average set a record-high on Thursday of 12,674 before falling 21 points today to 12,653. The 30-year mortgage rate remained steady for the week at 5.85%. Read the full report here.

Detroit Teachers Highest Paid in US

From "Is $34.06 Per Hour 'Underpaid'?" in today's WSJ:1. According to the Bureau of Labor Statistics, public school teachers earned $34.06 per hour in 2005, 36% more than the hourly wage of the average white-collar worker and 11% more than the average professional specialty or technical worker.2. The urban areas with the highest teacher pay are famous for their abysmal outcomes. Metro Detroit leads the nation, paying its public school teachers, on average, $47.28 per hour. That's 61% more than the average white-collar worker in the Detroit area and 36% more than the average professional worker. In metro New York, public school teachers make $45.79 per hour, 20% more than the average professional worker in that area. And in Los Angeles teachers earn $44.03 per hour, 23% higher than other professionals in the area.3. Evidence suggests that the way we pay teachers is more important than simply what they take home. Currently salaries are determined almost entirely by seniority -- the number of years in the classroom -- and the number of advanced degrees accumulated. Neither has much to do with student improvement.

Teenage Unemployment

From today's BLS employment report:1. Overall unemployment rate for January: 4.6% (up from 4.5% in December)2. Unemployment rate for teenagers: 15%3. Unemployment rate for black teenagers: 29.1% (240,000 unemployed)4. Unemployment rate for white teenagers: 13.2% (793,000 unemployed)Bottom Line: There are currently more than 1 million unemployed teenagers who are actively looking for employment and are unable to find jobs. Question: Will a 40% increase in the minimum wage make it EASIER or HARDER for these 1 million unemployed teenagers to find jobs? See the cartoon above for the answer.

The New Big 3: GM, Toyota, Chrysler

From today's Detroit News: "For the first time in recent memory, Ford Motor Co. fell to No. 4 in U.S. auto sales behind General Motors Corp., Toyota Motor Corp., and DaimlerChryslerAG's Chrysler Group, demonstrating just how far the automaker has fallen as it battles to stop a decade-long decline in market share.

At the same time, the Detroit automakers' share of the American auto market fell to just 50.6%in January as they narrowly avoided selling fewer cars and trucks than foreign makers in a month for the first time ever."MP: 1.09 million vehicles were sold in January, and 16.55 million vehicles were sold in 2006. At an average price per car of $20,000, U.S. vehicle sales in 2006 were about $330 billion. To put the size of that market in perspective, if the U.S. vehicle market were to be considered as a separate economy, it would be the 21st largest economy in the world, after #20 Sweden (GDP of $354B), and ahead of Saudi Arabia ($310B), Austria ($305B), Poland ($300B), Indonesia ($287B) and Norway ($283B).

Thursday, February 01, 2007

Interesting Research

From an article in the Chronicle for Higher Education:"More than a quarter of the black students enrolled at selective American colleges and universities are immigrants or the children of immigrants, according to a new paper by sociologists at Princeton University and the University of Pennsylvania.

The finding suggests that native-born African-American students are even more underrepresented at selective colleges than is commonly understood. The paper is likely to add fuel to a long-standing debate about the meaning and purpose of affirmative-action programs.

Selective colleges have expanded their enrollments of black students by "increasing the number of immigrant and multiracial black students," said Camille Z. Charles, an associate professor of sociology at Penn who is one of the study's authors.

"If you're a purist" -- that is, if you view affirmative action as restitution for the harm done by American slavery and segregation -- "then you'll think that this is not in the spirit of affirmative action," Ms. Charles continued. "But if you're a diversity purist, and your idea is to expose everybody to as many different kinds of people as possible, then you'll think this is great."

Euphoric India Becomes a World Power

From the IHT article "Corus takeover turns India euphoric""India, a former British colony, is discovering that it is far better to take over than be taken over.

India erupted with serves-them-right jubilation this week when Tata Group, an Indian conglomerate, won a bid for the Corus Group — the Anglo-Dutch descendant of British Steel — for more than $12 billion, the largest acquisition ever by an Indian firm. Headlines spoke of empires striking back, while pundits and industrialists said India had at last arrived as a world power.The takeover of Western companies by Indians has struck many here as evidence of a delicious reversal of fortune: a once-proud civilization, having fallen to the humiliations of colonization, is now buying out the hallowed corporations of the West."

Global Cooling, Global Warming

Borat Banned in Russia

People in Russia won't be able to see the movie Borat, not legally anyway. The BBC reports that the Russian Culture Ministry has refused to give the film a distribution license because it could humiliate members of some ethnic groups and religions.

Interesting Starbucks Facts: 8 New Stores Per Day

1. A record 728 Starbucks stores opened during the most recent quarter -- an average of 8 stores per day! It has 13,168 stores worldwide.2. The company's goal remains to have 20,000 stores outside the U.S. It now has 3,767. 3. Starbucks opened a record 223 stores overseas during the quarter (average of 2.5 per day), including the first Starbucks in Brazil and Egypt. Stores in Russia and India will open in 2007.Read more here.

Getting Paid NOT To Farm = $1.3 Billion

"The Bush administration yesterday proposed ending farm subsidies for an estimated 80,000 wealthy individuals as part of a broad plan that would close loopholes and cut traditional farm programs by $4.5 billion over the next 10 years.The plan would close a major loophole highlighted by The Post that in 2005 allowed corn farmers to receive $3.8 billion more than needed to ensure they got the government-guaranteed price. The plan also proposes changes in a program that since 2000 has enabled some landowners who do not farm to still collect $1.3 billion in farm payments."

Superbowl Tickets on Ebay

Govt Loses $40m Minting Pennies and Nickels

"How dumb do you have to be to mint money at a loss? In the latest only-in-Washington episode, we find that the government may have lost as much as $40 million coining pennies and nickels last year.

The metal in them — the zinc, copper and nickel — has soared in value in the last few years (see graph above - zinc prices have risen 4.5X in the last few years), making the coins more valuable as raw materials than they are as currency. The government reaction has been to ban the melting of the coins to get the metal."

Bleeding Hearts Ruin the Carpet

From George Will's latest column:In Arizona, some amazingly persistent and mostly liberal people are demonstrating the tenacity with which some interests fight to prevent parents of modest means from having education choices like those available to most Americans.Fifty-seven years later, the Sumner Elementary School in Topeka is back in the news (Brown v. the Board of Education of Topeka involved Sumner in 1950). Two educators wanted to use Sumner for a charter school, a public school entitled to operate outside the confinements of dictated curricula and free from many work rules written by teachers unions. Their school would have been a back-to-basics academy for grades K through five, designed to attack Topeka's 23-point gap between the reading proficiency of black and Hispanic third-graders and that of whites.

When the school board rejected the application of the two educators -- African-American women -- but praised their dedication to children, one of the women was not mollified: "A bleeding heart does nothing but ruin the carpet.''

Cartels Aren't Forever: Update

From Wired Magazine's "Lab-Grown Diamonds Make the Cut":Since 2003, synthetic diamond production has taken off, driven by consumer demand for merchandise that’s environmentally friendly (no open-pit mines), sociopolitically neutral (no blood diamonds), and monopoly-free (not controlled by De Beers). As a result, Gemesis, the leading manufacturer of gem-quality diamonds has expanded operations rapidly. Three years ago, the company had 24 diamond-producing machines; now it has hundreds - matching the cash-value output of a small mine - and is turning on a new one every other day. “At this point, we operate like any other mine,” says Clark McEwen, COO of Gemesis. “We produce rough diamonds in our machines and sell to distributors who do the cutting and polishing.”

Wednesday, January 31, 2007

The Secret of Viable Ethanol: Brazil's Sugar Cane?

America’s subsidy-dependent ethanol farmers may not like it, but a recent U.S. pact with Brazil could pave the way to an efficient global market in biofuels—and that could change the game.The only obstacle to our getting Brazilian ethanol is a 54 cent per gallon tax on imported ethanol, designed to protect a U.S. industry which is in no position to provision our own market (and probably will not be for some years to come, if ever).From The Secret of Viable Ethanol.

Trade = New Technology to Increase Productivity

Beyond myth and emotion, here’s the truth about our trade deficit. It’s big, but it’s not necessarily bad. In fact, it may be helping us live better, now and in the future. Rutgers University economists Chad Bown and Rachel McCulloch explain in "Question & Answer: The Trade Deficit."

Here is an excerpt:

"It’s helpful to think of trade as representing a kind of new technology that allows us to get more or bet­ter output from the same available inputs—which is the definition of increased productivity. There is a clear overall benefit, but trade, like improved technology, does hurt some people in the process. Over time, how­ever, our rising standard of living depends on higher productivity—whether achieved through improved technology or gains from trade."

Prices: What They Say

Wanna Bet?

The website Longbets.org takes bets on predictions that are "societally or scientifically important." Here is a list of predictions and bets on record. Here is an example of a bet that "By 2030, commercial passengers will routinely fly in pilotless planes."

The Goldilocks Economy Plus

From today's WSJ: "The U.S. economy resurged at the end of 2006, overcoming a slump in housing as consumers sustained by lower energy prices freely spent money.

GDP climbed at a 3.5% annual rate October through December, the Commerce Department reported today. The 3.5%, fourth-quarter increase not only defied original expectations but also was much better than Wall Street generally thought in predictions made this week. The median estimate of 22 economists surveyed Monday by Dow Jones Newswires was 3.0% growth.

For the year, GDP, advanced 3.4%, compared to a 3.2% increase in 2005 and 3.9% growth in 2004." (see graph above)

"You know, for all this talk about recession, (with some pundits calling for a recession just about every year—Paul Krugman comes to mind), the reality is that economic growth has been steady and strong following the 2001-2002 recession. Think lower marginal tax rates, implemented in 2003 to strengthen work incentives, and significantly increase after-tax investment rewards."

Do Not Take Jim Cramer Seriously

"When you own a diversified portfolio of stocks, it is rarely the stock selections that make you money but the performance of the stock market overall—which, thankfully, usually goes up. What a truly talented stock-picker will do is select stocks that beat the market, after costs, without exposing you to more risk than the market. Because the vast majority of stock-pickers can't do this, you are almost always better off in a diversified portfolio of low-cost index funds. Properly constructed, such a portfolio will, over decades, make you more money, with less risk, than even an above-average stock-picker (let alone a chair-throwing, self-aggrandizing clown)."

My advice: Watch Jim Kramer for entertainment purposes only, and buy and hold the Fidelity S&P 500 Index Fund as a major part of your investment portfolio - the expense ratio on that fund is only 1/10 of 1% ($100 annually on a $100,000 investment - you can't invest more cost effectively on your own, and no broker will manage your investments for 1/10 of 1%) and you'll beat 97% of actively managed mutual funds in the long run, after expenses and taxes.

Tuesday, January 30, 2007

It's All About Math: Everything Can Be Graphed

In Defense of Price Gouging

Recently, CNN's Anderson Cooper condemned price gouging in New Orleans as if he was reporting an inherently unjust practice that no reasonable person would accept. So perhaps we need to consider why price gouging is not only not bad, but why it is essential to the welfare of everyone involved. Without "price gouging" after natual disasters, people often don't get the essential goods they need. Free markets after hurricanes or earthquakes are both humane and necessary.Read more here, "Price Gouging is Essential and Humane."

Private Efficiency vs. Public Inefficiency

In August 2005, Hurricane Katrina flattened two bridges, one for cars, one for trains. Sixteen months later, the automobile bridge remains little more than pilings. The railroad bridge is busy with trains.

The difference: The still-wrecked bridge is owned by the U.S. government. The other bridge is owned by railroad giant CSX Corporation. Within weeks of Katrina's landfall, CSX dispatched construction crews to fix the freight line; six months later, the bridge reopened. Even a partial reopening of the road bridge, part of U.S. Highway 90, is at least five months away.

"It shows the difference between the private sector and the public sector," says a government bureaucrat. "By the time CSX was done with its bridge, we were just getting around to letting the contract on ours."

MP: The main difference between capitalism and socialism? Capitalism works.

Interesting Fact of the Day

From today's Washington Times: "The 100 largest corporations have replaced 56 CEOs in the last five years."We hear a lot about "excessive CEO pay," but don't hear very much about the high, or "excessive" CEO turnover?

The Smell of Profits, Here Comes Google

From today's International Herald Tribune: "The Internet search provider Google, moving to broaden its revenue beyond advertising, is poised to shake up the business software market.

Google is bundling the Web-based software programs that it offers free to consumers into a premium package, and, in a challenge to Microsoft, it will be selling a paid version to businesses.

Google's enterprise product, which will include e-mail, calendar, word processing, spreadsheet, instant messaging and voice-over-Internet programs, will be released soon. The move comes as Microsoft prepares to bring out Office 2007, the new version of its best-selling productivity software suite, as well as Vista, the latest upgrade of its ubiquitous operating system."

MP: Competition breeds competence; the smell of profits has a strong, attractive odor; vigorous competition is the best regulator; and who needs the Department of Justice when you have vigorous competition from Linux and Google?

Inequality of Home Prices: Miami is #1

Business Week has a story on "The Inequality of Home Prices," where it has quantified the inequality of house prices for more than 100 metro areas by comparing the size of the gap between the 99th percentile home price to the median home price. #1 is Miami:

A History of Microsoft Windows

Tour the 23-year history of the Windows operating system at this link from Wired Magazine, starting with Windows 1.o (above), which was released in November 1985 ("It's not surprising it was a flop. Windows 1.0 was more an extension of MS-DOS than its own operating system, but it did allow limited multitasking and mouse support.")

Bottom Line: Even though OECD's Europe's unemployment rate is at all-time low, it would rank #51 as a U.S. state, behind Mississippi's jobless rate of 7.5%. Even in its worst recession, or even in its worst state, the U.S. economy outperforms most other economies in their best years.

Trade Works Both Ways

"On Capitol Hill, some lawmakers portray Chinese imports as a threat to national prosperity, and Democratic leaders argue that free-trade pacts have sold out American workers; a hearing is scheduled in the House for today. Last year's election reflected anxiety about the strength of American companies in a global economy.

But the nation's shop floors present an alternate view: The United States is in the midst of an export boom, with foreign sales chipping away at the country's enormous trade deficit while providing a modest cushion against the declining housing market.

In the first 11 months of 2006, U.S. exports reached $1.31 trillion, a jump of 13.1% over the corresponding period in 2005, the Commerce Department said. That was an improvement over the 10.7% gain of the year before. Recent monthly figures show exports growing nearly three times as fast as imports. Economists say exports are being propelled by a falling dollar, which has lost nearly 10% of its value compared with other currencies since 2002, making U.S. goods cheaper on world markets.

Exports to China -- whose dominance on American store shelves stokes worry -- increased by 33% in the first 11 months of 2006. Combined with Hong Kong, China now stands as the United States' third-largest export market, behind only Canada and Mexico."

Outsourcing to Brazil: India of the Americas?

"Outsourcing seems to be working out well for Brazil, South America's most populous nation. With a spate of information-technology deals, Brazil appears poised to be Latin America's big winner in the global outsourcing boom.

With time zones and a culture closer to those of the U.S. than Bangalore or Beijing, small operators and multinationals including Accenture and IBM are betting that Brazil could quickly become Latin America's major hub for inexpensive corporate support work, and a top-five location world-wide. Brazil's major selling point is that its big cities are just one to three hours ahead of New York, depending on the time of year. That compares with 11 or 12 hours for India."

Why is Health Care Expensive? WWII Wage Controls

Health care costs are out-of-control because consumers pay only 14% of health care costs out-of-pocket. Why do consumers pay so little? Because price and wage controls during WWII led to employer-paid health care as a way to circumvent the wage ceilings, and we've been paying a huge price for the last 60 years because of the significant distortions in health care market resulting directly from the price/wage controls.

Jeff Jacoby summarizes the situation extremely well in today's Boston Globe, here are some exerpts from his column "The Tax-code Quirk and the Health Care Mess:"

"Why is it that in every other field where enormous technological strides have been made, total costs have fallen over time, but in health care they have increased?

The answer is simple: Health care costs so much because most of us pay so little for it. And we pay so little -- out-of-pocket expenses amount to just 14 cents of every health dollar spent in this country -- because a third party nearly always picks up the tab. For most working Americans, that third party is an insurance company paid by their employers.

All of this is due to a quirk in tax policy dating to World War II, when employers looking for a way to enhance workers' salaries without running afoul of federal wage controls hit on the idea of providing medical benefits. When the IRS agreed not to treat such benefits as taxable income, it triggered a far-reaching change in the way Americans paid for health care.

What had been a relatively free market in medical services, with patients transacting directly with doctors and hospitals, gave way to a third-party system, in which employers paid the insurance companies, and insurance companies paid the bills. Americans increasingly used insurance to cover routine medical expenses, not just major unexpected costs like hospitalization or surgery. Imagine what automobile insurance would cost if people insisted on plans that had low deductibles . . . or policies that included not just major body work, but also oil changes and gas."

Final 2006 Partisan Rankings for Columnists

Lying in Ponds analyzes, tracks and measures Democratic and Republican bias and partisanship of a selection of regular political columnists from various sources, including the New York Times, the Wall Street Journal’s OpinionJournal, and the Washington Post. Here is the methodology used.

For the second year in a row Paul Krugman and Molly Ivins were the most partisan columnists in the U.S., they switched places in 2006 - Molly Ivins went from #2 in 2005 to #1 in 2006, and Krugman went from #1 in 2005 to #2 in 2006. The top four most partisan columnists are:

See the top 20 here. Note that David Brooks (NY Times), Charles Krauthammer (Wash Post) and George Will (Wash Post) are the most non-partisan unbiased columnists, and they criticize/praise Dems/Reps with almost equal frequency.

How Do You Compete Against Starbucks? Sexpresso

To stand apart from the hordes of drive-through espresso stands that clutter the Northwest's roadsides, some Seattle-area commuter coffee stops such are adding bodacious baristas, flirty service and ever more-revealing outfits to the menu. Read more here in the Seattle Times.

500th Posting on Carpe Diem

From today's WSJ, an editorial about the $133 billion forecast error for federal tax revenues that I previously reported in Carpe Diem.

"Data released last week from the Congressional Budget Office confirm that the tax cuts of 2003 keep soaking the rich, especially on their capital gains. CBO originally estimated that reducing the capital gains rate to 15% from 20% would cost the Treasury $5.4 billion from 2003-2006.

Whoops. Actual revenues exceeded expectations by 68%,creating a $133 billion revenue bonanza for the feds. CBO's original forecast for 2006 was for $57 billion in capital gains revenues, but actual receipts were $110 billion. This surprise windfall is one reason the budget deficit is also far lower than CBO predicted.

The lower capital gains tax has raised stock values by raising the after-tax return on capital investment. It has also given stock owners a greater incentive to sell their shares, and then reinvest the proceeds, because the tax penalty on these transactions is lower. Class warriors like Senator James Webb (D-Va) often forget that the capital gains tax is voluntary. Investors can defer paying the tax for years by holding on to their stock. This creates what is called the "lock-in effect" that deters an efficient allocation of investment capital."

P.S. As the headline mentions, this is the 500th posting on Carpe Diem since its inception on September 20, 2006, which is 131 days ago. That's an average of 3.82 postings per day!

Sunday, January 28, 2007

Market Capitalism Goes Global

"The U.S. is losing market share in the global economy, and that is not necessarily a bad thing," according to Dan Grossman in today's NY Times.

"The U.S. share of global GDP fell to 27.7% in 2006 from 31% in 2000. In the same period, the share of Brazil, Russia, India and China — the rapidly growing emerging markets referred to as the BRICs — rose to 11% from 7.8%. China alone accounts for 5.4%.

The fact that economies that were closed to outside investment a generation ago are now creating systems of market capitalism should be seen as a victory for the U.S., not a defeat. “Many of the countries that are doing well are mimicking the best of what the U.S. has stood for — globalization and the export of the American capital markets culture,” said Mr. O’Neill at Goldman Sachs."

Ben Stein on Capitalism

"Capitalism values people as individuals according to contract, as we lawyers and economists learn, not according to the status of our birth. This in itself is a miracle.

This miracle has been vibrant in the lives of hundreds of millions of Americans who have gone from nothing to something, thanks to the dynamics of capitalism. They have seen their pay rise and they have been able to convert their sweat and toil and creativity into capital by saving and investing in the stock market and becoming capitalists themselves — myself.

The system of capitalism is wide open. If you have an idea, you can turn it into capital."

If I did my math correctly (.0333 x 10 to the 6th), computers today are more than 33,000 times faster than in 1971, or at least that is the increase in the speed of the microchips. The original microprocessors were used in the Busicom calculator/adding machine (see picture above).

Big Corn: Ethanol Has Many Consequences

"Ethanol gets a 51-cent a gallon domestic subsidy, and there's another 54-cent a gallon tariff applied at the border against imported ethanol. Without those subsidies, hardly anyone would make the stuff, much less buy it -- despite recent high oil prices.

So here comes Big Corn. Make that Very, Very Big Corn. Sooner or later, our experience with this huge public gamble may make us yearn for the efficiency, capacity, lower cost and -- yes -- superior environmental record of Big Oil."

"Mexico is in the grip of the worst tortilla crisis in its modern history. Dramatically rising international corn prices, spurred by demand for the grain-based fuel ethanol, have led to expensive tortillas."

Milton Friedman Day: January 29

The University of Chicago and the Chicago Mercantile Exchange are organizing a memorial service on the afternoon of Monday, January 29, 2007 at 2:00 p.m. to be held on the University of Chicago campus, where Milton Friedman developed many of his most important and enduring ideas. Featured speakers include Nobel economist Gary Becker and Václav Klaus, President of the Czech Republic.

The University of Chicago Memorial is being streamed live via http://www.ideachannel.tv at 2:00 p.m. CST and this site will also have an exclusive audio discussion available, featuring Nobel economists Gary Becker and Ken Arrow discussing Friedman and his ideas.

Read the Presidential Proclomation from the White House about Milton Friedman here.

A 90-minute documentary "The Power of Choice: The Life and Ideas of Milton Friedman," will air on PBS stations around the country on Monday, January 29 (10 p.m. in Michigan, check local listings here for other parts of the country).

Friday, January 26, 2007

"Socially Responsible" Investing?

"The market has proved remarkably efficient in determining what marks a corporation as "good." Customers and investors vote on that every day. It should come as no surprise that a recent Wharton study calculated that funds that layer on ideological screens often perform worse than the general market by about 31 basis points a year, a huge discrepancy.

Domini Social Equity Index, considered the gold standard of social index funds, rates a lackluster C- in Business Week's latest ratings. Calvert's Social Index Fund has lost 1.82% since its inception in 2000, ranking it in the bottom 15% of all funds. Now Bill and Melinda Gates are being asked to turn over investment for billions of dollars to these same social researchers?"

Stock Market Fever in China, Like US in 90s

"China's stock markets are almost going mad, actually, with the leading Shanghai market at nearly 3,000, as ordinary Chinese flock to buy equities in breathless, record numbers. The bull market is so dramatic — the Shanghai index hit a record high this week before falling back slightly — that one senior Chinese official has warned against "blind optimism."

The leading Shanghai market is still less than two years removed from lows that dipped below 1,000 (see graph above). It finished Friday at 2,882.56 points, up 0.88 percent from its close Thursday. It hit a record of 2,933.19 at the start of the week."

Economic Week in Review

Summary: A pair of reports on new and existing-home sales gave mixed readings on the housing market for December but confirmed that home sales in 2006 dropped significantly from record levels in 2005. In other reports this week, orders for durable goods increased and an index of leading economic indicators ticked upward. The S&P 500 touched a six-year high on Wednesday but decreased 0.4% for the week to 1,422. The yield of the 10-year U.S. Treasury note increased 11 basis points to 4.88%.

Economic Growth

We now take economic growth for granted, but historically it is a very recent phenomenon, see the graph above. In human history, sustained positive economic growth has only been a reality in the last few hundred years. Using this dataset of GDP per capita from year 1 to 2003 in Western Europe, we can see that:

1. It first took more than 1800 years (until about 1820) for per capita income to double from $600 to $1200, and the annual growth rate during that period was 1/25 of 1% per year, almost negligible.

2. It next took about 70 years (until 1890) for per capita income to double from $1200 to $2400, and annual growth in income was about 1% per year.

3. It next took about 60 years (until 1950) and economic growth was about 1.2% per year.

4. Since the 1950s, growth has been doubling every 20-25 years in Western Europe and the US, at a rate of about 2-3% year.

Bottom Line: Sustained economic growth of even 1% per year was not a reality until the 19th century, and sustained economic growth of 2-3% was not a reality until the last 50 years. Putting it in historical perspective, it makes the recent obsession with "income inequality" kind of inconsequential. It could be a lot worse, and was a lot worse throughout human history, for the average person. And complaining about income inequality in a country like the US where per capita GDP is about $42,000, must seem very strange to those in the rest of the world where per capita GDP is only $7500. Kind of like members of an exclusive, private country club complaining about differences in income between the "rich" and "super-rich" member of that club?